While you’re staring down your online cart where the millionth streaming service sits ready for purchase, debating between that and starting up your 401k retirement plan, take a beat to let your mind wander 40 years down the road: You’re watching the waves roll on a receding tide, a drink order on its way. Tomorrow, you’ll take in the city culture and eat some fish dish you can’t pronounce. That life starts with little choices made today and tomorrow and the next day.
Right now, your main concern is probably figuring out how to balance bills with actually enjoying life, not calculating compound interest for a future you can’t yet envision. But don’t get strung out, budgeting maestro! You don't need to stash away a whopping 25% or more of your paycheck like a squirrel hoarding nuts for winter. Every little bit truly does count, and the dollar you put away today might just turn into a yacht-sized reward tomorrow.
What is a 401k?
A 401k plan is a type of retirement account sponsored by your employer. You choose a percentage of income that will be taken out of each paycheck and invested in options such as stocks, bonds and cash.
Scared of investing? True, it can be cutthroat out there, but with a 401k you get to control the risk level you’re comfortable with.
- Feeling like a financial daredevil? Go for an aggressive investment strategy.
- Don’t trust the economy? Hold your money close with a conservative investment strategy.
- Somewhere in-between? No problem, Goldilocks. Go for a moderate investment strategy to prepare for your golden years.
Beware, though: the closer you get to retiring, the less you want to be doing financial backflips. The younger you are, the higher, more aggressive risk tolerance you can afford because you’ll have more time to recover from any pitfalls, but remember to taper it off as retirement approaches.
What is my employer's role in my 401k?
Your employer is the sponsor of the 401k plan, and they are responsible for the management of their employees’ plans. Most will partner with a third party to act as an administrator or investment advisor.
While employers are not required to match your contributions, it is pretty common for them to match up to a certain percentage, and that’s like free money, my friend. Even if your employer doesn’t match what you’re putting in, you’re still getting tax-free growth that you wouldn’t see on your everyday savings account. Unless you’ve got a mind for high-return investments, grab that 401k bull by the horns and ride out the returns.
What are the benefits of a 401k?
If your employer is offering a 401k, run, don’t walk. Snatch that thing up and start depositing. Yes, the contributions will come out of your paycheck, but it comes out of your gross income, and you choose the percentage that works with your budget. The benefits far outweigh the deferred income. Take a look at these 401k benefits:
- They are employer-sponsored + your employer may offer matching contributions (kind of like free money!)
- Convenient contributions are deducted from your paycheck automatically
- Tax advantages as contributions come from pre-taxed income + reduce your taxable income. You'll likely be in a lower tax bracket when you withdraw the money during retirement, saving you money in taxes.
- Potential for penalty-free 401k withdrawals for certain life events or loans secured by your 401k
- Investment flexibility means you can adjust it to your risk tolerance
- The compounding interest leads to faster + higher growth
- 401k plans are portable so you’re money travels with you if you change companies
"But I want that cool car now, Not when I'm auditioning for AARP commercials."
There will always be a new car model, a new fad to keep up with, another something that you want in the now, and you should enjoy life in the now. Just remember that later will also eventually become the now, so you need to find your budgeting balance between the two.
Only you can decide what’s right for your financial journey, but don’t let a temporary excess of today get in the way of a thousand amazing experiences waiting for you in retirement. Small deposits made to a 401k build up over time and lead to even more adventures later in life. That future train is chugging its way to your station, whether you're ready or not, and you’re really gonna want to hop on.
Diversify your retirement savings by adding an IRA from SunWest Credit Union into the mix and give your retirement planning an extra boost.
December 15, 2023
Published by SunWest Credit Union
Go on, share this awesome article: